What is Accrued Payroll an How to Manage it Effectively

In this guide, we’ll break down what accrued payroll really means, and show you how to keep it accurate, compliant and stress-free at month-end.

What accrued payroll means

Accrued payroll is simply the pay and related costs your employees have already earned, but you haven’t paid out yet.

In accounting terms, accrued payroll (or payroll accruals) is a current liability that covers all earned but unpaid compensation at a point in time. That usually includes base wages and salaries, overtime, bonuses, commissions, employer payroll taxes, and things like pension contributions or holiday pay that have been earned but not yet processed.

This liability exists because of the accrual basis of accounting: you recognise pay costs when people work the hours, not when the cash leaves the bank. In practice, that means your balance sheet shows “wages payable”, “salaries payable” or “accrued compensation”, while your profit and loss already includes the related expense. If you use earned wage access (on-demand pay), employees may draw some wages earlier, but from an accounting view the full amount is still accrued until it’s paid.

Accrued payroll vs accrued wages vs accrued compensation

Managers often see different labels for very similar ideas:

Accrued wages – usually just unpaid hourly or salaried base pay that employees have already earned.
Accrued payroll – a wider bucket that normally includes accrued wages plus overtime, bonuses, commissions, employer payroll taxes and benefits.
Accrued compensation – sometimes used in finance to include even more items, such as share-based pay or long-term incentive plans.

👉 The key takeaway for a time-poor manager: when you hear “payroll accruals” in 2025, think “everything we owe people for work done so far, including on-costs, even if the payslip has not gone out yet”.

💡If you struggle to see what staff have actually earned at any given date, you can use Shiftbase time tracking and absence balances to keep worked hours and holiday accruals up to date before your payroll run, making your accrued payroll figure much easier to calculate.

How accrued payroll works in real life

This is where the tidy definition meets messy real-world schedules, overtime and changing contracts.

Typical scenarios across pay periods

Imagine your pay period runs from Monday to Sunday, but your month ends on a Wednesday. By that Wednesday, staff have already worked part of the current pay period; those hours, plus any holiday earned and unpaid overtime, sit in your payroll accrual until the next payroll is processed. Tools like ADP and QuickBooks emphasise that this gives a more accurate view of labour costs and cash flow.

Here’s a simple example of how payroll accruals build up across a month-end cut-off:

Item	Example detail (UK/US style)	How it hits accrued payroll at month-end
Base hours worked	3 days of a 5-day week completed	Wages payable / salaries payable
Overtime	4 hours at time-and-a-half already worked	Accrued overtime and related taxes
Holiday entitlement earned	Holiday accrued on hours worked so far	Accrued holiday pay liability
Employer NI / payroll taxes	On all earned wages and overtime	Accrued payroll tax liability
Bonus or commission	Target met but not yet approved for payment	Sometimes accrued, sometimes disclosed

In sectors with lots of variable pay, such as retail or hospitality, overtime and “normal remuneration” for holiday calculations are especially important. UK guidance on holiday pay for irregular hours and part-year workers stresses that pay for holiday must reflect normal patterns of work and pay.

What happens if you change pay frequency or classification mid-year?

Real life does not stand still, which is why payroll accruals must handle change. If you move employees from weekly to monthly pay, you will usually need a one-off adjustment to clear old accruals and ensure the new cycle starts cleanly. The same applies if employees change from non-exempt to exempt (or vice versa) under US Fair Labor Standards Act rules; you must ensure all overtime already earned has been correctly accrued before the change.

How to calculate accrued payroll step by step

This is the practical bit: a simple method you can reuse at every month-end or year-end close.

Step-by-step calculation for hourly and salaried staff

A straightforward seven-step approach looks like this:

Set your cut-off date and time
Decide the exact point you want the figures for (for example, 23:59 on the last day of the month).
Pull hours worked but not yet paid
Export or report on all approved hours, including partial weeks, from your time tracking or timesheet system.
Calculate base pay
- Hourly staff: hours × hourly rate.
- Salaried staff: pro-rate annual salary over the period not yet paid (for example, 3 days of 5).
Add overtime correctly
Identify any overtime hours not yet on a payslip and multiply them by the correct premium rate (for example, 1.5× under FLSA rules in the US for hours over 40 in a week).
Include bonuses and commissions where appropriate
If staff have already met the conditions for a bonus or commission, estimate the amount due and add it to your payroll accruals, following your accounting policy.
Add employer on-costs
Apply the right percentages or amounts for employer National Insurance, pension contributions, or employer payroll taxes that relate to these unpaid earnings.
Include holiday/PTO accruals
Add holiday or paid time off that employees have earned but not yet taken or paid out, following local rules.

The most common mistakes in payroll accruals involve variable pay. US DOL guidance stresses that “regular rate of pay” for overtime must usually include non-discretionary bonuses and certain incentives, not just basic hourly wages. If your overtime accrual ignores these, your liability will be understated and you risk back-pay claims.

Performance-related pay is also more common. CIPD reports that many UK employers now use individual or team performance bonuses, which need to be reflected in accruals once they are probable and can be reasonably estimated. A simple policy is to accrue bonuses monthly once performance against target is clear, then true-up when final numbers are approved.
Accrued payroll is not only about the cash employees receive. You also need to accrue employer payroll taxes, employer pension or retirement contributions, and other on-costs linked to the unpaid earnings. In the UK, that typically means employer NIC and pension contributions; in the US, Social Security, Medicare and unemployment taxes.

Paid leave sits alongside this. Holiday or PTO accruals should reflect both legal entitlements (for example, UK statutory leave rules after the 2024 reforms) and any extra contractual leave you offer. Make sure your HR system can show, for each employee, how much leave has accrued and what that is worth in pay terms, especially if local law requires you to pay it on termination.

💡Shiftbase lets you track worked hours, overtime, surcharges and leave balances in one timesheet, so you can pull a single report with contract hours, worked hours and specified costs before you calculate your payroll accruals.

Recording accrued payroll in your accounts

Once you have the numbers, you turn them into journal entries and make sure the liability is visible and easy to understand.

Journal entries for accrued payroll (with simple tables)

A basic payroll accrual at month-end usually looks like this:

Account	Debit (£/$)	Credit (£/$)
Payroll expense (wages, salary)	40,000
Payroll expense (overtime, bonus)	5,000
Employer taxes and benefits	7,000
Accrued payroll (liability)		52,000

When you later run payroll and pay staff, you reverse this accrual and record the actual payroll:

Account	Debit (£/$)	Credit (£/$)
Accrued payroll (liability)	52,000
Bank		52,000

Reversing vs non-reversing payroll accruals

You have two main options for handling payroll accruals in your month-end close:

Reversing entries
- You record an estimated payroll accrual at month-end.
- On the first day of the next period, your accounting system automatically reverses it.
- When the actual payroll entry is posted, it reflects the real cost, and the accrual has already been cleared.
Non-reversing entries
- You post the accrual at month-end and manually adjust it once the actual payroll is known.
- This can work in very small businesses, but it is easier to make mistakes and leave old accruals on the books.

Most modern accounting guidance treats reversing payroll accruals as best practice because it keeps your ledger clean and reduces manual corrections during busy month-end periods.

Legal and compliance snapshot

Here’s how the current rules around pay, overtime and holiday interact with payroll accruals.

In the US, the Fair Labor Standards Act (FLSA) still sets the basics: most non-exempt employees must get at least the federal minimum wage and overtime at 1.5× the regular rate for hours over 40 in a workweek. The US Department of Labor’s overtime fact sheets make clear that the regular rate normally includes non-discretionary bonuses and incentives, not just the hourly wage.

In 2024 the DOL published a final rule to increase the salary threshold for exempt “white-collar” workers, but in late 2024 a federal court in Texas overturned the rule and further appeals are ongoing into 2025. For payroll accruals, that means you should treat exempt/non-exempt status as a risk area and confirm classification with legal or HR before deciding whether to accrue overtime. If someone should be non-exempt but you treat them as exempt, your overtime accruals will be wrong from day one.

Final pay is largely driven by state law. Many states have strict deadlines for issuing final cheques and different rules on whether accrued vacation or PTO must be paid out. From a payroll accrual perspective, this means you may need to accrue unused PTO as a wage liability in states where payout is required, but not in others, depending on your policy. Good practice is to keep a simple state-by-state matrix for PTO payout and make sure your accrual rules match it.
In the UK, Working Time Regulations and National Minimum Wage rules drive most of the risk around accrued payroll. Since leave years starting on or after 1 April 2024, irregular hours and part-year workers now accrue statutory holiday at 12.07% of hours worked, and employers can (for these workers only) use rolled-up holiday pay if it is clearly itemised on payslips. This is set out in the government’s 2024 guidance on holiday reforms.

Advisers like ADP and DLA Piper have highlighted that these changes effectively “reset” how many employers calculate holiday accruals for casual staff and emphasise the need for accurate records of hours worked and holiday taken.

At the same time, UK media report that claims for unpaid holiday pay have surged by nearly 900% after the rule changes and recent tribunal decisions, and a 2025 ruling has challenged the old two-year back-pay limit. This makes clean holiday accruals and clear payslips essential, especially in sectors with irregular hours such as hospitality and care.

Designing a payroll accrual process that actually works

This section turns legal risk and theory into a practical way of working across HR, payroll and finance.

Governance: who owns what (HR, payroll, finance)

Good payroll accruals are a team sport. CIPD’s Pay, performance and transparency 2024 report stresses that clear ownership and data flows are key to fair and transparent pay decisions. A simple responsibility split can look like this:

Area / task	HR team	Payroll / operations	Finance / accounting
Contract terms & pay policies	Own and update	Implement in systems	Check for financial impact
Schedules, shifts & time tracking	Define patterns and rules	Run rota and approve hours	Use data for cost analysis
Absence and holiday approval	Set policies and approve leave	Record and update balances	Validate provisions match liabilities
Payroll configuration & pay runs	Sign off on rules and changes	Process pay, deductions & corrections	Reconcile to ledger and bank
Payroll accrual calculations	Provide assumptions (e.g. bonus)	Supply final hours and pay data	Own accrual entries and reviews
Compliance & audits	Train managers, update policies	Keep records and logs	Lead audits and respond to queries

👉The main takeaway: Everyone should know who is responsible for the inputs to your payroll accruals and how changes (new bonus schemes, rota changes, EWA/on-demand pay) are communicated.

Month-end payroll accrual checklist (5–7 steps)

A light, repeatable month-end checklist keeps payroll accruals accurate without turning close into a marathon. You can adapt the steps below to your context:

Freeze the period
Lock or agree the cut-off date/time for hours, overtime and absence to be included in this month’s payroll accruals.
Approve outstanding timesheets
Make sure all managers have approved working hours and overtime. No “draft” entries should be included in the accrual.
Update absence and holiday balances
Confirm that holiday, sickness and other leave have been recorded correctly and holiday accrual is up to date for irregular hours and part-year workers (using the 12.07% rule in the UK where applicable).
Pull a single report of hours and pay elements
Export or generate a report of base hours, overtime, differentials, bonuses and commissions that relate to the unpaid period.
Apply agreed rates and on-costs
Calculate accrued pay using correct rates, making sure overtime uses the proper regular rate under FLSA where relevant, and add employer taxes and benefits.
Review exceptions and reasonableness
Compare this month’s payroll accrual to previous months. Investigate big jumps by site, department or location before posting journals.
Document key assumptions
Note any estimates (for example, bonuses or commissions) and the basis you used. This helps with year-end audits and internal reviews.

Year-end reconciliation and audit readiness

Year-end is your chance to prove that payroll accruals across the year were sensible. Auditors and regulators expect you to reconcile what you accrued against what you actually paid. In practice, that means:

Running a year-to-date report of all payroll expenses and comparing it to the sum of payroll accruals and reversals.
Checking that large year-end accruals (for example, unpaid bonuses or holiday pay) are backed by contracts, policies or approvals.

Using Shiftbase, you can keep historic schedules, approved timesheets and absence records centrally, which makes it much easier to evidence how you arrived at your year-end payroll accruals when auditors or inspectors ask.

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How Shiftbase keeps payroll accruals accurate

Accurate accrued payroll starts with clean data on who worked when, at what rate, and with which type of leave. Shiftbase brings this together by linking employee scheduling , time tracking and absence management in one platform, so your accruals are based on reality, not on spreadsheets and guesswork.

Because your rota and timesheets live in the same system, planned shifts flow straight into worked hours, with overtime, surcharges and hourly wages applied automatically. Approved hours and breaks are visible per day, team or location, giving finance an instant view of what has actually been earned but not yet paid—ideal for month-end payroll accruals. At the same time, real-time absence and holiday balances help you keep on top of leave accruals, especially for part-time and irregular hours staff.

If you want your payroll accruals to match what really happens on the shop floor, you can sign up for a free 14-day trial of Shiftbase and see how much easier month-end becomes when your schedules, hours and absences are all in sync.

Frequently Asked Questions

In your accounts, accrued payroll is normally recorded as a credit to a liability account (such as “accrued payroll” or “wages payable”) and a debit to payroll expense. When you later pay staff, you debit the liability and credit cash. Getting this right keeps labour costs in the correct accounting period.
Yes, in most organisations accrued payroll is a current liability, because it will be settled in the short term—usually at the next payroll run or within a few weeks. Only very unusual long-term incentive schemes would sit in non-current liabilities, and those are usually handled separately from day-to-day payroll.
Usually yes. Even if someone is on a fixed monthly salary, they may have earned part of that salary by the balance-sheet date but not yet been paid. You also still need to accrue things like overtime, allowances, holiday pay and employer taxes for salaried staff where they apply, especially in markets with strict overtime and holiday pay rules such as the US (FLSA) and UK (Working Time Regulations).
Accruals are only as good as the underlying data. With Shiftbase you can combine rota planning, time registration and absence management, and then use timesheet and absence reports as the single source of truth for your payroll accrual calculations and exports.